CLP Beacon - Business Issues and Solutions

Tuesday, September 27, 2016

Six (Relatively) Easy Steps to Meet Regulatory Requirements

I get the question all the time of “how do we meet
regulatory requirements” and that question comes from different industry
segments. Many times, we think meeting these requirements is extremely difficult
and onerous. Yet, I have a very simple approach and a checklist to share that
can ease the burden of meeting these requirements.

Here are my six steps:

Deliver a quality product or service. Set
standards for your industry and your company but most importantly get feedback
from your customers on whether they perceive the product or service is of high
quality. There are many tools that can help you do this.

An independent
function must monitor the business to ensure proper operation

Ensure your activities are auditable

Company must have appropriate
policies and procedures in place and understood

Documentation should
be kept up to date

Reports from
monitoring activities must be directed to and read by senior management

Perform audits at an appropriate frequency, but
at least annually

Results from these audits
should be reported to and read by management. In fact, including the results as
part of normal operational reviews would be ideal.

Management should use
these reports to guide decision making.

Ensure the staff understands that exceptions
must be reported to management promptly

When an exception
occurs the correct staff can be engaged and the appropriate corrective action
can be performed quickly.

Exceptions will occur.
These present opportunities for improvement – be it better documentation,
better or more frequent training, and improved monitoring among other things.

Disclose all relevant information to your
customers

Open book management is preferred as customers appreciate being kept
informed.

Additionally, by so doing, customers
are able to make informed decisions on whether the product or service is right
for them.

Thinking about these steps leads me to believe this is
simply an articulation of the best long-term business strategy. Of course, most
people will agree that the goal is to produce a quality product! And to ensure
that the quality is delivered consistently! Who wouldn’t follow these steps? It
makes so much sense.

Ah yes, it seems obvious, but one needs to consider why
companies fail to do this. Let’s look at a recent, high profile case in the
news relating to Wells Fargo. Why didn’t Wells Fargo ensure that accounts being
opened by some of the 5,300 staff that were terminated were in fact requested
and authorized by their clients? How could over 2% of the total staff be fired
and this not raise questions from senior management, in particular the Audit Committee
of the Board?

Many things have been cited as contributing to this untoward
outcome, in particular, unrealistic sales targets for retail bank employees
that were part of the business culture. The culture of the bank was not as
described in the Code of Conduct. While profits did grow and senior managers
were rewarded for achieving that growth, clearly reporting of problems to
senior management either was non-existent or ignored by senior managers.
Neither bodes well.

But let’s think about a completely different regulatory
environment – that of the FDA. These same six steps have to be part of the
business model so that FDA inspections do not result in product recalls, FORM
483s or even Warning Letters. All three of these events entail reputational damage
for the business. Not having these, or at worst only on a very exceptional
basis, would indicate to the market that the business is indeed following an
appropriate business model. In this case, the market perceives that the
business produces quality products, and discloses in its labeling all relevant
facts so that medical professionals and their patients can make informed
decisions about their products. And this applies to the food industry as well.
Consider the damage to Chipotle’s reputation and the impact this has had on
their revenues.

So we again come to those few salient questions. Why
wouldn’t a business deliver a quality product or service? And why would they
not choose to do so consistently? The answer is really quite simple.
Consistently delivering a quality product or service is not free. Doing so
requires overheads such as maintaining documentation, continuing staff
training, monitoring of business activities, and consistently reporting to
management so their decision making is consistent with business performance. Ah
yes, and those audits really are necessary to ensure there are no gaps and the
business is consistently delivering quality to its customers. We believe that
you inspect to get the expected!

Over the long term, a firm’s reputation strengthens as
customers trust that the firm delivers quality in its current and new product
offerings. This leads to more effective product introductions and quicker adoption
by the target market. The net effect is that doing the right thing will, in
the long term, increase the firm’s profitability which no doubt is in the
interest of all stakeholders. But short term profits might suffer and that is
the rub in this myopic financial world, especially for publicly traded
companies.

Oh yes, those overheads mentioned above. They reduce the
near-term bottom line and therefore the bonus potential, i.e. bonuses of the
current management. Cutting some of those overhead expenses means current
management can participate in a larger bonus pool in the short term. And as
tenure in managerial roles has reduced over time, what’s to worry about if it
hits the fan three or four years down the road? The probabilities are that
management change will have occurred and the new managers will have to clean up
the mess – likely at greater expense than the cost savings chosen by the previous
management – and the firm’s reputation will be damaged. Repairing reputational
damage is always expensive, if it is even possible.

What happened at Wells? The head of the retail division that
was responsible for opening over 2 million unauthorized accounts to meet sales
targets retired in July with a package worth $125 million. This executive was lauded by
the CEO as the embodiment of the firm’s culture and a champion for customers.
When asked by the Senate Banking Committee if her past bonuses would be clawed
back, not to mention his own, the CEO said he couldn’t comment on that as it
would be determined by the Board. Time will tell whether the CEO survives and
whether any bonuses are clawed back by the Board. Needless to say the
reputational damage is perceived by investors who have marked down the bank’s
shares. That, in addition to the $185 million fine are the costs being born by
shareholders. Arguably all for increased short-term bonuses to management.

In my practice area, Risk and Crisis Management,
we help companies understand the various risks of managing a public or a
private business. We can then affect the right plans and help the executives
reduce their business, marketing and regulatory risks. Feel free to contact me
at bnewton@clevelpartners.net
and I will be glad to share some additional thoughts with you.